Correlation between remuneration, personality of directors and focus of shareholders
CEO PAY MODEL STRONGLY DETERMINES LONG-TERM INVESTMENTS IN SUSTAINABILITY
The CEO renumeration model of companies strongly determines the extent to which they invest in sustainable production and R&D and aim for long-term results. This is one of the main conclusions of (experimental) research conducted by SEO Amsterdam Economics on behalf of non-profit organization Reward Value Foundation among 3,000 respondents in the Netherlands and abroad. In addition to the remuneration policy, personality characteristics of executives and the focus of shareholders also play an important role. In addition, there is a strong correlation between these three factors.
The research shows that there are three key factors that influence investments in sustainable production and drive long-term results: incentives for executives (remuneration model), personal characteristics of directors (degree of focus on environment, society and governance, or ESG) and the context in which directors operate (degree of shareholder focus on ESG). There is a visible correlation between these factors: the highest average investments in sustainable production occur among respondents with a pro-ESG renumeration model, a personal focus on ESG and pro-ESG shareholders.
Effect of financial incentives
Frederic Barge is founder of Reward Value Foundation. The non-profit organization works with investors, universities and business to modernize executive pay as a catalyst for positive change. “One of our main conclusions is that financial incentives in executive pay definitely have an effect on executive behavior. For example, respondents make different choices for investments in sustainable production and R&D as a result of the company’s remuneration model. One of the findings is that respondents who receive a higher bonus for sustainable production, allocate 10% more resources to clean production than respondents who receive a lower bonus for the (environmental) impact of production. By shifting the focus from a short-term bonus to a long-term bonus, we see a 14% increase in R&D investments.”
Personal characteristics and external pressure
Personal characteristics of respondents also play a significant role in their choice to invest in clean production. The research shows, for example, that participants with an ESG-oriented management view opt for these kinds of investments much more often than fellow board members who find the ESG theme less relevant. In addition to financial incentives and personal characteristics, external pressure also seems to be of influence. “Executives with shareholders who value ESG, invest significantly more in sustainable production compared to companies with shareholders who mainly value (short-term) financial performance. Participants with long-term oriented shareholders, invest no less than 27% more in R&D”, Barge says.
Long term value creation
Barge: “Remuneration is important to initiate positive change in companies. Having the right remuneration model in place results in an increase of investments in R&D and sustainable production. The personal preferences and motivations of executives are also very relevant. Adding the right focus and preferences of shareholders in alignment to such responsible remuneration plans, there is a considerable chance of greater social long-term value creation by a company. Organizations that want to make a difference should look carefully at their remuneration policy, the type of executives on their board and the focus of shareholders. The right combination of these three strongly connected factors results in the highest level of positive impact.”
About the research
For this research – designed and conducted in the first half of 2022 – 3,000 respondents took part in an online laboratory experiment. As part of the experiment. they had to decide between allocating resources to current production or to R&D for future production, and also between producing a profitable product at a cost for society or a less profitable product at no cost to society (ESG). Because each respondent participated in both parts of the experiment, there were approximately 6,000 unique observations.
The research is supported by the Goldschmeding Foundation.
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